Fed's serene consensus builder

Janet Yellen’s performance as the first woman to head the US Federal Reserve is remarkable for how unremarkable it has been. She has slipped into the position as if born for it.

Since February, without breaking a sweat, she has managed the scaling back of the Fed’s unprecedented asset-purchase programme. Now she is confronting with aplomb the delicate task of shifting back to a more conventional monetary policy regime.

OMFIF was an early supporter of Yellen to head the Fed, favouring her over Lawrence ‘Larry’ Summers, the former Treasury secretary. As Meghnad Desai, chairman of the advisory board, wrote in the June 2013 OMFIF Bulletin: ‘Janet Yellen is the best bet to head the Federal Reserve when Ben Bernanke steps down as expected in January. She has steady hands and will be a consensus-building chairman... The need for now in the western economies is to get a sustained recovery. Fiscal tools have been blunted, as a result of the debt burden. It will be a clever monetary policy that will do the trick. Yellen can deliver it.’ (See below.)

For building consensus between hawks and doves on the Federal Open Market Committee, for a splendid spirit of serenity, and above all for presiding over a policy that – for the time being at least – makes the US the world’s growth engine, OMFIF is pleased to name her as our choice for Person of the Year.

Yellen is an intellectual heavyweight, but is a much less abrasive personality than many others who have held, or have aspired to, her job. That is an advantage when the international power of US monetary policy and of the dollar’s role is on daily display. The continuity of her embrace of Bernanke’s ‘forward guidance’ is another hallmark. As Bernanke’s vice chairman from October 2010 to last February, she was a prime mover behind this greater transparency.

As a result of this policy, Fed watchers have a good idea – perhaps around mid-2015, dependent on the wider economic picture – of when to expect the ‘lift-off’ of interest rates from the zero bound of the past five years. And they can see at nearly first-hand how policy-makers are developing new tools like interest on excess reserves and reverse repurchase agreements to steer short-term rates if overnight bank lending is no longer sufficient.

Yellen vies with German Chancellor Angela Merkel for the position of the world’s most powerful woman. Yet the most striking feature of her first 10 months at the helm of the most important central bank is how little Yellen has had to prove.

She is an unapologetic dove, standing up for the Fed’s dual mandate that puts as much weight on maximum employment as on price stability. She has resisted hawkish cajoling to raise interest rates, as long as inflation is subdued and there is labour market slack. She shrugs off dissent as ‘natural’ in the monetary debate. Yet she has made clear that if upward inflation pressure reappears – a difficult and sensitive call, given the fall in energy prices – she could bring forward interest rate tightening. Yellen’s consensual abilities, aided by US economic strength, contrast with dissonance at other major central banks, notably the European Central Bank, uncomfortably trying to practise a single monetary policy for 18 separate nations.

Without any great public demonstration of her tactics, Yellen seemed to tame the FOMC hawks at the latest end-October policy meeting, ahead of the final meeting of the year which starts today.

Richard Fisher of Dallas and Charles Plosser of Philadelphia, who had dissented in September, voted in favour of the consensus statement maintaining the 0 to 0.25% federal funds rate ‘for a considerable time’ after the end of the asset purchases in October. The condition for approval appeared to be addition of a passage stating that labour market slack ‘was diminishing.’

Both men are rotating out of FOMC voting positions at the end of 2014, and are retiring in March. Since these two are the FOMC’s most outspoken hawks, the body next year will by definition be more dovish. Arch doves from Chicago and San Francisco move into voting slots, along with a centrist from Atlanta and the hawkish head of the Richmond Fed.

In the political field Yellen holds her counsel and keeps her distance. President Barack Obama has never shown much knowledge of or interest in economic policy. His advisory team is notable for its lack of notable economists. A Summers supporter, Obama only reluctantly named Yellen to succeed Bernanke after Summers bowed to pressure and withdrew from the race.

The president didn’t find time for a one-on-one meeting with her until November, nine months after she took office. Yet Obama needs Yellen more than she does him. The president likes to brag at G20 meetings about the relatively strong US economy. Most of the credit must go to policies initiated by Bernanke and continued by Yellen. The US recovery would have been stronger, and the labour market would have improved more quickly, if a more robust fiscal stimulus could have supported the Fed’s monetary stimulus, but the branches of the US government have been mired in partisan discord.

Meanwhile, Yellen and the Fed sail on, plotting the transition to normalcy step by step, meeting by meeting. Yellen has acquired leverage to call the lift-off as she sees it. She has left herself an escape hatch by insisting the decision will be driven by data, not by vague worries about the unintended consequences of monetary easing. A big question is whether a collapse in stock market prices, if it coincided with genuine worries about higher inflation, could cause her to act not to shore up markets (as many Wall Street economists hope and expect) but to quell incipient price pressures. Sometimes the most fervent doves can turn out unexpectedly hawkish.

Yellen raised some eyebrows in October when she gave a speech on her concerns about growing inequality of US wealth and income, the clearest sign of her holistic approach to economic and monetary policy. She is a working economist steeped in academic literature and lifestyle. She can argue with the best (and worst) of the technocrats. Yet she never loses sight of the connection between economic data and real life. In the challenges and dilemmas lying ahead, that characteristic should serve her and the US economy well.